High street takeovers a welcome boost for retailers

THE major deal dominating the retail landscape recently has been the protracted £351m takeover of House of Fraser - which has more than 60 stores across the UK, including Edinburgh-based department store Jenners - led by Icelandic investment group Baugur.

The acquisition consortium - called Highland - also includes Scottish entrepreneur Sir Tom Hunter, who will take an 11 per cent share in the firm: Karen Millen founder Kevin Stanford; Icelandic investment company FL Group and Bank of Scotland - another regular partner of Hunter's.

The deal will inevitably fuel speculation about the future of much-loved Jenners, which relinquished family ownership when sold to House of Fraser two years ago.

Highland said there was "room for operational improvement" at the chain. A source said: "Highland wants to bring in some fresh ideas to the UK high street, some from the US and Far East, and House of Fraser has plenty of space to trial them."

The House of Fraser deal is the largest yet for Baugur which already owns many of the UK's best-known high street names including Karen Millen, Iceland supermarkets and jeweller Mappin & Webb.

Underlining this renewed belief among Scotland's dealmakers is the recent £45 million deal which saw the Internacionale and Au Naturale chains sold to its management.

The management buy-out - the biggest in Scotland for 18 months - provides founder and majority shareholder Ken Cairnduff with a personal fortune estimated at around £30m.

The acquisition comes amid a significant upturn in MBOs and valuations and is regarded as a huge vote of confidence for Scots retailers in the face of a tough environment on the high street.

Internacionale's senior management team of Norrie Stewart, David Milton, Gerard Gavan and Graham Clements were backed by a private equity syndicate led by Glasgow-based Penta Capital and Barclays Scottish Leveraged Finance team.

The deal is the largest since the MBO creation of Aberdeen oil services company RBG in January 2005. It also means one of the country's biggest retail chains remains under Scottish ownership.

A new parent company - called Ossian - has acquired the 68 stores of fashion retailer Internacionale across the UK. The deal also includes the company's homeware chain Au Naturale which has 79 stand-alone outlets and 16 concessions. Ossian now employs more than 2,700 people and makes operating profits of £5m on turnover of £125m.

Stewart said: "This is a profitable, fast-growing, cash-generative business. The investment positions us well for rolling out the next phase of growth - expanding further south to build on our presence in Scotland and the north of England."

Plans are also afoot to solidify Internacionale's position as a cut-price fashion retailer in an increasingly competitive landscape which has seen supermarkets move into cheap women's fashion and the likes of Next and Marks and Spencer dropping their prices. Stewart added: "For a company like Internacionale that traditionally had price as its cutting edge - that edge has been eroded a little bit. We need to speed up getting the right fashion in quicker and sharpening the prices even more."

Penta Capital led a £10m equity syndicate that includes Graphite Capital and Bear Stearns Private Equity. Barclays' leveraged finance unit - led in Scotland by Ally Scott - provided a £28m debt package to the deal.

It represents a coup for Barclays, which has been keen to show its muscle against the big two Scottish banks.

Scott said: "In addition to being an exciting deal for the old and new management alike, this is a great story for Barclays in Scotland as the transaction was shown to a number of potential funders prior to our engagement.

"We teamed up with Penta early in the process to provide a compelling proposition and were delighted that the management decided to mandate both parties to support them."

Cairnduff, who retains a minority share in the company, will now devote more time to his property interests. He said: "I'm delighted that my directors have succeeded in this MBO. After grooming Internacionale into one of the UK's leading retailers, I was keen to sell the business to those who helped me get it there. My 'baby' is in excellent hands."

KPMG in Scotland were the lead advisers for the deal, which took six months to close. Bruce Walker, corporate finance director, said: "This represents a great story for corporate Scotland. In constructing the deal we were particularly pleased to partner a successful Scottish management team with a strong Scottish financial backer. In a climate where we are seeing more and more Scottish businesses being sold to foreign corporates, it is great to see one of this country's leading retail companies retain its strong Scottish identity."

Mark Prentice, head of corporate banking at Lloyds TSB Scotland, fully endorses that view. "That is one of my favourite themes at the moment - it's a great message," he said. "There's been a history of companies growing and becoming successful in Scotland then someone comes along and buys them from abroad.

"It is nice to see that tide is turning a little bit with the Internacionale deal and we hope that trend continues, particularly in retail."

Prentice added that he believes the retail sector is in relatively good shape. He said: "We like retail and we are currently putting funding together for a few retail deals."

But he cautioned: "Like a lot of markets, you have got to pick winners. It is dangerous to say a market as a whole is great. In retail there are good players and bad players.

"We spend a lot of time ensuring that we are backing winners rather than ones who are not."

David Leslie, head of corporate finance at PricewaterhouseCoopers predicts that deals like the Internacionale one will prompt renewed interest in the retail sector among dealmakers.

"The retail market was buoyant about 24 months ago when there was a mass volume of deals. But since then, there has been more uncertainty in terms of spending on the high street," he said.

"But in terms of corporate finance deals, I think retail does lie at the centre of the Scottish market. There are a lot of well-known retailers who will continue to go on and do deals."